Media 2.Uh-Oh Part 1: Pipe

me·di·a
- Channels of communication that serve many diverse functions, such as
offering a variety of entertainment with either mass or specialized appeal,
communicating news and information, or displaying advertising messages.

That's pretty lame. Even Katie Couric is confused. Like the elephant and the seven blind guys, some think of media as content, others as distribution, aggregating viewers attention, user generated content, ad sales, keepers of our culture, public trust and on and on. How can you lump TV, radio, movies, newspapers, music, cellphones, cable, satellite into one phrase?

My definition is quite simple: Media is about control of a pipe.

Everything
else follows. I recently sat through a presentation by junk bond king
Michael Milken. He flashed up photos of some of his old clients: Ted
Turner, John Malone, John Kluge, Rupert Murdoch, Craig McCaw. Each one
of them had borrowed billions in high yield (junk) debt to build their
media empires. Banks wouldn't lend to them, but Milken's network would,
because he saw something that banks couldn't see - each of these guys
controlled a pipe, there fists gripped tightly around it, and could
leverage that control into massive media companies.

And not just any pipe, a government-mandated pipe that guaranteed
control. Turner had TV station licenses, Malone had cable lines, Kluge
radio and TV spectrum, McCaw cellular licenses and Murdoch, who at one
time only had newspapers, bought up enough TV stations (and demanded
regulations on ownership to be relaxed) to form the Fox Network to
challenge ABC, CBS and NBC and their pipes.

Here is what I mean:

If this is just a pipe that anyone could use, there is no way Milken
would trust these guys to generate enough cash flow to pay back his
debt. He never would have lent them billions.

Nope. This is a closed system. You only allow the voices, music or
video of your choosing down your pipe. You control choice. Viewers can
flip channels, to a degree, but you figure out a way to get paid for
that too! Iron pipes, not flimsy PVC.

Control the pipe and you've got an economic engine to run ads
against your content, charge subscriptions, sell voice calls and charge
per minute - the world is your oyster.

Movies? Hollywood does control access to theaters (ask anyone trying
to get screens for independant films) but their economics include
"windows" on cable (HBO) and TV, hence the same media companies own
studios as well. Control a pipe and extend the business to everything
it touches.

While media includes newspapers and magazines and even billboards, the root of practically every media empire is control of a some pipe. Spectrum, bandwidth, cable lines, phone lines, sewers - any closed system.

Adage has a great illustration of all this. Check out their PDF of Media Family Trees by
revenue in 2005. Very telling. Look for the pipes they control.
TimeWarner and Comcast: cable, Disney: TV licenses and cable stations
like ESPN, News Corp: TV licenses, cable stations and newspapers. As an
aside in non-electronic media, read Roger Lowenstein's 1995 book Buffett: The Making of an American Capitalist for a great story of Warren Buffett trying to make Buffalo, NY a one newspaper town so he could control a pipe.

Once you control a pipe, the economic model of media is pretty
simple. My buddy Rob Hersov, an old Morgan Stanley colleague out of
London, and I came up with this in 1992, something we called EPI-LIT.
Entertainment (or Editorial) and Perishable Information Leading
Indirectly to a Transaction. All right, I know it sounds stupid, but it
explains everything. I wrote this up in a series of columns for Rich Karlgaard at Forbes ASAP back in 1995. I've reposted the columns here. Bear with me, this was a long time ago. Many of the examples are dated but I suspect some of the ideas (finally!) work.

Sitcoms and sports (entertainment) along with news and weather
(perishable information) draws in viewers, in whose face you jam
branded advertising until they can't see straight, so they go forth and
buy lots of Bud Light, Gillette Fusion razors, Avodart and Mazda
zoom-zooms.

Ad sales are based on the concept of scarcity. Sellers want to reach
a large and perhaps targeted audience of buyers. If they are in the
spell of your pipe, you can charge a premium. The TV network conduct an
"upfront" auction each year, hoping to sellout the ad slots forcing
costs per impression higher. Weird business. The incentive is to limit
the number of pipes.

And its not just ads. Own a solid enough pipe and eventually you can
control distribution of movies (HBO) and NFL games and charge
subscription fees (Disney gets $2.50+ a month for ESPN whether you
watch it or not). Control the pipe and charge whatever you like.

Ratings allow you to charge more, but even the worst or least
watched shows generate decent sales. Talent eventually figured out how
to weasel their way into this model, demanding $1 million fees per
episode or $20 million to open moveies. But its only because someone
else controls the pipe that these extravagent numbers are possible.
Same with Derek Jeter earning $20 million a year. The YES Network is another controlled pipe. It's a tax on the stupid (viewer). We pay up for the artificial scarcity.

We all can't own pipes, so this tends to leave media in the hands of
a very few moguls who get Wall Street to fund their follies. They
receive all sorts of praise as brilliant business men. But are they?
Thomas DiLorenzo wrote a piece on Robber Barons for free market site mises.org:

...the distinction between what might be called a market entrepreneur and a political entrepreneur. A pure market entrepreneur,
or capitalist, succeeds financially by selling a newer, better, or less
expensive product on the free market without any government subsidies,
direct or indirect. The key to his success as a capitalist is his
ability to please the consumer, for in a capitalist society the
consumer ultimately calls the economic shots. By contrast, a political entrepreneur
succeeds primarily by influencing government to subsidize his business
or industry, or to enact legislation or regulation that harms his
competitors.

These media moguls are political entrepreneurs who adore regulation that keeps them controlling pipes. I love this quote from Peter Wallison in the WSJ:

...industries that rely on regulation to protect them from
competition build a coffin instead of a wall. In our dynamic and
innovative economy, regulation is a double-edged sword. While it might
confer some temporary protection from competition, in the long run it
isolates the regulated industry from the realities and opportunities of
the marketplace.

Yup,
and then the Internet came along. Move along - no scarcity here. Cisco
routers send packets around to where folks want them - no moguls
needed.

Market entrepreneurs used the chaos of packet switching to deliver text
and pictures to websites. Then bandwidth got cheap enough to move music
around crumbling record labels control of distribution. It's hard out
there for a ... And now bandwidth is even cheaper and more plentiful
and its time for video to move around this wild and wholly network.
Those pipes are now coffins. The moguls will die within them.

Yeah, there is some last mile pipes for cable modems, DSL and getting packets to cellphones. But while Stanford Professor Larry Lessig
has done a great job of pushing the network neutrality debate which
seems to have slowed the ability of any of these last mile pipes
becoming the root of a media empire, beware of more regulation.
Perversely, someone will take any net neu regulations and turn them
around to be able to control a pipe. Cellular is about as close to an
end to end pipe.

Plus, there are unregulated paths such as Wi-Fi and hopefully more
competition, not less to keep this map with no "end to end" pipes that
the likes of Sumner Redstone or a future Ted Turner can control with an
iron fist.

Wall Street knows this. It's why media stocks have looked "cheap"
for a while now. The pipes they control are leaky. Things like Skype
for free or cheap phone calls are killers, even if Skype isn't quite a
business on its own. Municipal Wi-Fi whacks everybody, phone companies,
cellphone operators and at some point, with say, 3 megabit connections,
real standard definition video can be delivered outside of pipes. Who
needs to pay Comcast $99 a month anymore for crap they don't watch
anyway?

The old moguls know this too. They are all scrambling for a Web
strategy. Murdoch buying MySpace is interesting, but the fact he cut a
deal with Google to sell ad means he isn't interested in actually
investing in it as a platform for the future. What are these guys to do?

Hey, how about Web 2.0? How about it - APIs, mashups, user content,
hyperlinks, Mentos. Oooooh! Co-o-o-ool. We can just simulate a pipe.
Google did it, right? $10 billion in ads. Yeah maybe. But without a
pipe, is their platform precarioius?

No pipes, no moguls, no media?

It's a cliffhanger - who shot JR? In the next piece, I'll take a look at the model the technology business has evolved into and what that might mean for Media 2.Uh-Oh.

Comments

While not as "hard" as a traditional pipe (or channel as it may be called), we're seeing some other "soft pipes" arise which are primarily around:

- Branding: building a house-hold name recognition for a product/service, e.g. YouTube = user-generated content as did Kleenex = tissue pape
- Scale: building enough traffic around a brand to achieve some economies of scale, e.g. bandwidth negotion leverage/discounting
- Self reinforcement: a relatively "self-contained" community that is self-referential so that the brand and scale is amplified exponentialy, e.g. YouTube video comments on other people videos.

Yes, there is no barrier to exit from these soft pipes, per se, but perhaps some of these soft pipes will help create the next set of Media Moguls.

On a side note, when there is no one regulating the "soft pipes", (e.g. Hollywood Studios, network channels, etc regulating the hard pipes), then there will be a subsequent problem with unfiltered cluttered media option choices. A new "recommendation" model will have to arise over time to help consumers make educated choices.

You're right on as usual. The logical conclusion is that more and more spectrum ought to be unlicensed - esentially an Internet of the air. Although there was originally a good reason for it, government-awarded spectrum is now an exercise in pipe-making and political entrepreneurship.

Evidence? The exciting stuff like WiFi is happening in the few unlicensed shards of spectrum which do not support monopolies rather than in the vast wasteland of regulated and allocated spectrum.

you're right that you can't control the pipe when the internet provides alternatives.

you're wrong that no one has control just because there's no more pipe.

owning great content -- or the ip and tools to source future great content -- makes a difference. owning a large audience of advertisers, and the best methods to optimize for advertising monetization, also play a huge part.

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